Legalweek 2024: Key Insights on Legal Trends for Mid-Sized Firms

Episode Notes

Transcript

Karolina Sikorska:

Hello and welcome to another edition of On the Road with Legal Talk Network. This is Karolina Sikorska. I’m the sales manager at InfoTrack, and I am the host for this episode, which is being recorded on location at Legal Week 2024 in New York City. Joining me now, I have Joshua Lenon from Clio who hosted Clio’s 2024 Legal Trends Report session. Welcome to the show.

Joshua Lenon:

Hi. It’s great to be here, Karolina. Thank you.

Karolina Sikorska:

Thank you. Before we get into our discussion, please tell us a little bit more about yourself. Joshua, where do you work and what do you do?

Joshua Lenon:

Thanks. So I’m Joshua Lenon. I’m the lawyer in residence at Clio. It’s a made up title, but I’m an attorney admitted to New York. And the shorthand version of my job is I help translate the needs of law firms and lawyers to a technology company and vice versa. I can help translate how technology has both benefits and risks to law firms and how to best maximize those benefits and minimize those risks. And that can be from a compliance perspective, a practice management perspective, or actually just productivity and the increases that can be gained via technology. I’ve been doing that for about 11 years now with Clio, and it’s been quite the trip to be perfectly honest.

Karolina Sikorska:

Amazing. Great. So I would love to have you start off with maybe a brief summary of the legal trends report, a little information about it, why Clio did it, and just share what you would like just to get us started.

Joshua Lenon:

You got it. The Clio Legal Trends report is actually something very unique, and before Clio was kind of a product on the marketplace, lawyers were operating entirely in their own little data silos. What a law firm was doing in their practice was completely divorced in terms of us being able to compare apples to apples to a practice just down the hall. And when Clio came out with our cloud-based practice management, that meant that lawyers from across the country were actually using the same software at the same time to practice law. And even though there are technical and contractual constraints on what Clio can see when it comes to law firm files and client datas, just by looking at how they’re using Cleo’s functions, we’ve been able to create a data-driven insight into the practice of law that hasn’t existed before. So since 2016, we’ve been publishing an annual legal trends report that takes a look at the tens of thousands of law firms that are contributing, aggregated, anonymized usage data to Clio.

And we’ve been able to extract things like what is the average number of hours that are really Bill in a day by most lawyers, what’s the average hourly rate for different practice areas per state? How good are lawyers at collecting money that are owed to them by their clients? And this year we’ve published our second version of the Legal Trends report that focuses specifically on mid-size law firms. So every year we publish our legal trends report, but now we’re starting to do breakdowns by firm size. And so we’ve done mid-size law firms and we’ll soon be announcing our legal trends report for Solo law firms later this year.

Karolina Sikorska:

Great. So looking at the legal trends report, what are your findings and what observations are you seeing?

Joshua Lenon:

So if I had to put them at three high levels, the first of which for mid-size law firms is that they are improving but not uniformly across all of their metrics. And so we see that mid-size law firms over the last eight years have had a real advantage when it comes to their utilization rate, and that measures the number of work hours in a day that they’re able to commit to billable activity. And when we first published Legal Trends report in 2016, the average for law firms was just right around a quarter of their day. So two hours a day was actually being spent on billable work. Over the course of the last eight years, mid-size law firms have started with an advantage. They’ve always been a little higher than that 28%, and they’ve been able to increase it over the last eight years to nearly 50% of their day being spent on billable work on average.

Yeah, that’s a really huge gain. And that means that these law firms with their higher billing rates and higher recorded build hours should be in a really great place financially. But later on in the report, we actually see that that’s not the case that mid-size law firms are struggling, which is our second high level point that when it comes to billing and collections, mid-size law firms are actually falling behind that of smaller law firms. And our last takeaway, which we’re happy to talk about too, is the fact that mid-size law firms, which we know are lagging when it comes to technology, are potentially expressing a similar attitude when it comes to artificial intelligence and maybe operating a few steps behind smaller and s Solo law firms out there when it comes to leveraging AI in their practice.

Karolina Sikorska:

Okay. Let’s start off with talking about the first point and talk about mid-size firms and with looking closer at collections and billable

Joshua Lenon:

Hours. So as I said, mid-size law firms blow Solo and small law firms out of the water. When it comes to utilization rate, the average lawyer is able to spend more time on billable work, nearly 10 percentage points more than Solo and small law firms. But then when we look at realization rate, how many of those recorded hours get on a bill and then we look at collection rate, how many of those build hours actually get paid? We see that mid-size law firms lag behind law firms consistently. In fact, they have the biggest cut in realization rate of the two cohorts that we compare in this report. And realization rate cuts always really shock me because it’s the one metric that is 100% in control by the law firm. You don’t always know how many hours you’re going to bill, but you should know that those hours are going to end up on the bill and instead they’re cutting them.

And we’ve asked questions about why they do that, and there are a lot of different answers. Most of them derived to, we thought the client would object or couldn’t afford to pay those hours, but even that, you should at least get them recorded and show them to the client. But then when it comes to collection rate, we’re actually seeing a really big drop estimated for 2023. So we haven’t seen all of December, 2023 bills paid at the time of this recording, and that’s why I’m saying the word estimated. But we’re seeing that the collection rate for mid-size law firms is estimated to drop from a high of 90% two years ago to now 83% for mid-size law firms. And it is not dropping that much for Solo and small law firms, I can tell you. And so there’s definitely some type of problem happening with these mid-size law firms when it comes to getting their hours on the bill and getting those bills paid.

Karolina Sikorska:

Okay. Tell us a little bit about lockup and what Clio does around that.

Joshua Lenon:

Yeah, so lockup is a new metric that we’ve published for the first time in 2023, and it’s an accounting term that basically measures how much of your earned revenue is actually waiting in somebody else’s bank account. And so it could be unbilled revenue. So you’ve done the work, your work is in progress, but it hasn’t gone on a bill yet, or it could be uncollected revenue that the bill has gone out, but you’re waiting. And lockup is always measured in days, and it’s meant to kind of let you know how much of your firm’s annual revenue is inaccessible to you at this point in time. And so it can be broken down in three different ways. It could be realization lockup, how much of your work in progress is being locked up and not being actually billed and paid for the benefit of the law firm.

It could be collection lockup, which means that we’ve sent the bills out and now we’re waiting, or it could be total lockup and total lockups. When we combine those two together to really see of our firm’s anticipated annual revenue, how much throughout the year are we going to just not have, and how do we overcome that gap when it comes to mid-size law firms, we see that they’re doing okay at realization lockup. The median lockup for midsize law firms is around 30 days, but when it comes to collection lockup, they’re actually really lagging behind smaller law firms, and they’re actually almost at two months of their revenue. It’s just locked up and they’re just waiting for it to appear. And there’s a real risk when you have that revenue locked up to businesses like law firms.

Karolina Sikorska:

What do you think is attributing to that in that space?

Joshua Lenon:

That’s a great question. And so we have two hypotheses right now. The first of which is that we think mid-size law firms aren’t leveraging all the new and modern ways to pay. And that could be because they’ve just been existing for a while and have their ways of doing things. And it may be that they’re not used to implementing new payment models as frequently as we see smaller law firms do. And the second is we know that a higher percentage of clients for mid-size law firms are businesses. And it could be that these mid-size law firms are assuming that businesses don’t want to utilize these new faster ways of pain, and so they aren’t making them available. But we definitely can see in the data that it’s to their own detriment.

Karolina Sikorska:

I know that you also mentioned that the Legal Trends report focuses in on ai, artificial intelligence and the thoughts around that among mid-size firms. I’d love to hear what the findings were about

Joshua Lenon:

That. Yeah, we did a survey of nearly 1500 lawyers asking about their thoughts for our official intelligence. Do they have any concerns? What are those concerns? And if they are using AI right now, how are they using it? And when it came to mid-size law firms, we saw that they had higher than average concerns about the use of artificial intelligence of the practice of law. There were two areas that stood out. The first is that mid-size law firms are much more worried about copyright as a potential sticking point when using artificial intelligence. And it could be they’re worried about their work product violating somebody else’s copyright, or it could be that they’re worried about their own outputs being used by somebody when the AI user doesn’t have the copyright for it. And that might be something similar to what we’re seeing with the New York Times lawsuit against Open ai, where OpenAI scraped the New York Times and the New York Times is claiming copyright on a lot of that material.

And so we’re diving more into try and figure out what really is the copyright concern. But that’s something for a later report. And the second issue that stood out amongst mid-size law firms is nearly one in three lawyers responded, theBar associations would never approve the use of artificial intelligence in the practice of law. And we did the survey over the course of the summer of 2023. And what’s interesting is since that survey happened, we’ve actually had five different bar associations issue some type of guidance on the use of ai, and there’s lots of qualifications on how you should use AI in the practice of law, but not a single bar. Association came out and said, you cannot use AI in the practice of law. So it’s interesting to me that that lagging adoption of technology in mid-size law firms that we reported on in 2023 may be influencing that same attitude towards artificial intelligence now in 2024.

Karolina Sikorska:

That is very interesting. And all of the findings from this report have been really insightful, and thank you for sharing all of that. Anything else you want to share that came up in the trends report?

Joshua Lenon:

Yeah, there was one other thing that we found really interesting, and that is smaller law firms seem to be offering just faster all payment models to their clients. So the ability to do tap to pay on a mobile phone or the ability to pay Vieth eCheck, and we don’t see those options being as readily offered by mid-size law firms, but the data is telling us that when they do use those types of payment options like online payments, credit cards, eCheck, tap to pay, et cetera, it actually speeds the time to get paid. They get paid twice as fast as mid-size law firms that don’t, and we’re seeing a reduction in their lockup as well. And so that means they have to rely less on having staff to do collections and chase down like past due bills. It means that they actually have more money in their bank account to cover the expenses and overhead of the law firm. So there are some real tangible and achievable approaches to solving the realization and collections problems that we’re seeing in the data from mid-size law firms, but they’re not just being uniformly adopted. So hopefully this report is encouraging these law firms to take a look at their own data compared to these benchmarks and see if these types of solutions will work for them too.

Karolina Sikorska:

Excellent. Thank you for sharing. Well, it looks like we’ve reached the end of the road for this episode. I want to thank Joshua Lennon for joining us today. If our listeners have questions or wish to follow up with you, how can they reach you, Joshua?

Joshua Lenon:

That’s a great question. So the first place I’d say is go ahead and grab a copy of the Legal Trends report. You can get it at Clio dot com slash enterprise for the mid-size law firm report and Clio dot com slash LTR for legal Trends report, and I can be reached at joshua at Clio dot com. That’s cl I o.com.

Karolina Sikorska:

Amazing. Thank you. Also, thank you to our listeners for tuning in. If you like what you heard, please rate and review us in Apple Podcasts, Spotify, Amazon music, or your favorite podcasting app. Until next time, I’m Karolina Sikorska and you’ve been listening to On the Road with Legal Talk Network.

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